Inflation in the Service Sector

Course: Fundamentals of Financial Planning
Lesson 2: Economic Concepts and Consumer Protection Laws

Student Question:

I was really hoping I could get some sort of expanded reasoning on the below statement if possible, please. I am having a hard time wrapping my head around this for some reason. I tried to Google this and look at some other resources, but still do not feel I understand this.

Thanks!

James

STATEMENT

Over the past three months, inflation has been increasing in the service sector of the economy. This generally indicates that the economy has been in a RECESSION during that time.


Instructor Response:

Hi James,

Thanks for the question.

Think of it this way. What is there to inflate in the service sector? Services are provided by people, so compensation is likely being driven upward by inflation. Inflation generally occurs during the expansion phase as demand rises.

The opposite would tend to be true in a recession. Demand is falling, unemployment may be rising; there would be no upward pressure on compensation.

How completely does this address your question?

Bruce